Tag Archives: bank runs

If you remember, I wrote a post last week that looked at the relative spreads between dollar and euro-denominated funding curves. I presented this chart in that post:

Fast-forward a week, and here’s an update that spans from May 6 to May 14, again using data from the FT:

We should note several things from this update:

First, spreads between dollar and euro funding curves have only compressed – not widened.

Second, the spread between overnight dollar Libor and euro Libor is now negative. So in other words, this point plus my first one highlight that dollar funding needs have only grown – not shrunk.

Third, on May 11, there was a dramatic spike in the spread for overnight euro Libor versus overnight dollar Libor, then it went back to being negative. So my question is this: was there a bank run? The only reason (in my mind, anyway) we would see a spike like that was if depositors were running to the banks to pull their euros out en masse.

I also put these charts together that show how rates have moved from two perspectives: the first shows how these rates all moved through time while the second shows how the yield curve has changed through time. The first pair of charts is for dollar Libor and the second pair is for euro Libor.

The last two charts of euro Libor show that overnight Libor spiked pretty intensely for one day. I went back to May 11th to get a sense of the newsflow, and here’s what I found:

FRANKFURT, May 11 (Reuters) – Deutsche Bank (DBKGn.DE) said European banks could face losses of between 50 billion euros ($63.5 billion) and 75 billion if the debt crisis in Greece continues to escalate and banks are forced to take a “haircut” on Greek sovereign debt.

So Deutsche sees writedowns and haircuts. Shocking. Then there was this from Moody’s:

Moody’s in a “special comment,” called the sovereign debt crisis “unprecedented.” European Union finance ministers agreed to an emergency loan package on Monday that with IMF support could reach 750 billion euros ($1 trillion) to prevent a sovereign debt crisis spreading through the euro zone.

…

“Contagion has spread from Greece — historically a weaker credit in the context of the euro zone — to sovereigns with stronger credit metrics like Portugal, Ireland and Spain,” Moody’s said.

That would’ve moved the market for Greek debt as the last few remaining Greek debt holders – like those who fought under Colonel Custer to the bitter end at Little Big Horn – would’ve been forced to capitulate and have their butts handed to them. Literally.

The company, kept afloat by a bailout and state guarantees in late 2008, said in a statement on Tuesday its exposure to Greek sovereign debt was 3.7 billion euros ($4.7 billion), with little to no exposure to Greek banking, local authorities and corporates.

It added its insurance companies had exposure to a further 1.2 billion euros of Greek sovereign debt, but this was less of an issue for Dexia itself.

Dexia had a 19 billion euro exposure to sovereign bonds at the end of 2009, of which 18 billion euros rated AA or below. It did not give a breakdown per country.

Now, I don’t know much about Dexia, but that sounds like a lot of sovereign debt rated AA or below for one firm to carry. And of that $18bn, almost $5bn is in Greece. But whether they experienced a run or not on the back of this release is unclear. They have a sizable balance sheet at €588bn, so if they got wobbly, it would matter.

Needless to say, Libor funding data is something that bears watching for the short to intermediate term.

EONIA has started to flatten out, particularly dramatic in the long end of the curve. But the front-end remains anchored.

Euribor? Comatose.

And then it hit me…

They don’t matter.

Here’s what matters: the spread between dollar Libor and Euro Libor. I compiled monthly snapshots of the curve going back to the beginning of the year (I love my readers but I’m not compiling 150+ daily Libor curves by hand):

You see it compressing rather dramatically. The reason is dollar Libor has been catching up to Euro Libor. The mad dash for dollars on the European continent is on. So viewed from that perspective, the Euro curves can be shaped any way they want at whatever levels – nobody is using Euros to fund themselves.

And I also noted the TED spread. It’s widening again. The chart is from yesterday, but today’s quote is at 31bps – another 6bp increase:

What makes the spread so disconcerting is this: the last time we saw a gigantic blow-out in the TED spread was before this:

TED blew out before some of these data sets existed. These are all Federal Reserve programs to bolster liquidity in the banking system. They’ve pulled out all the stops, and Fed funds trade around a range instead of a target. Everything that could be done has been done to dampen volatility in short-term funding. And it worked.

Europe’s worsening debt crisis is intensifying pressure on policy makers to widen a bailout package beyond Greece after a cut in the nation’s rating to junk drove up borrowing costs from Italy to Portugal and Ireland.

As German Chancellor Angela Merkel delays approval of a 45 billion-euro ($59 billion) Greek rescue, the crisis is spreading. Portugal’s benchmark stock index yesterday fell the most since the aftermath of Lehman Brothers Holdings Inc.’s collapse, while the extra yield that investors demand to hold Italian and Irish debt over bunds rose to a 10-month high.

Day by day, week by week, month by month this crisis has gotten worse. Some people think the answer is more money, bigger bailouts:

“Policy makers need to get ahead of the curve,” Eric Fine, who manages Van’s Eck’s G-175 Strategies emerging-market hedge fund. “This is no longer a problem about Greece or Portugal, but about the euro system.”

And this:

“What is missing in Europe is an authority that can back sovereigns through a crisis,” James Nixon, co-chief European economist at Societe Generale SA in London. “We desperately need this.”

That misses the point. It’s not bigger and bigger commitments to save the drowning Greeks that are needed. It’s finality. Finality can only come in one form: a boot out of the Eurozone and a default that serves as a springboard for a debt restructuring and significant privatization of government services and bureaus.

We have gotten everything but finality. We’ve gotten commitments of solidarity. Promises of funding mechanisms. Threats of cracking down on speculators. Blah blah blah, yadda yadda yadda. It’s been nothing but talk as the European leaders only strategy has been to jawbone and cajole the Euro higher.

That hasn’t worked:

The gap from two weeks ago has been filled and then some. Euro pressure continues to show itself on a daily basis, because, as the Bloomberg article put it:

“The biggest risk now is that the market speculates against every single indebted peripheral country, and that could lead to a sovereign debt crisis,” said Axel Botte, a fixed- income strategist at AXA Investment Managers in Paris. “The contagion risk is real.”

Not only have we not seen a change in the shape of the curve, but for the past several months the entire curve was compressing. All rates were headed lower. Only now are they starting to show signs of reverting back to where they were earlier in the year. The curves haven’t even made it back to the levels of last year.

So what does this mean? It means none of this matters to European banks until it does. Don’t know what that means? Read this.